Thursday, August 16, 2007

Flying under the bridge, but ahead of the curve...

I’ve got a bridge to sell you” sounds like a sleazy salesman’s pitch. But if Indiana governor Mitch Daniels offers you one, maybe you should believe him. Daniels has already auctioned the rights to operate the Indiana Toll Road—a 157-mile road linking the Chicago Skyway in the west to the Ohio Turnpike in the east—to a private group for $3.8 billion. He’s got other state assets he’d like to sell, too, if he can just get the Indiana legislature to go along.

Meantime, Chicago mayor Richard Daley has harvested $1.8 billion auctioning the Skyway itself to a private group, and another half-billion or so turning city-owned garages over to private operators. Now he’s trying to sell Midway Airport; it could fetch $3 billion.

These deals are the leading edge of what could become the biggest injection of competition and private capital into American government in generations. Across the country, cash-strapped governors and mayors are discovering that their airports, bridges, toll roads, water systems, and other revenue-generating operations are worth far more than they thought, and are eyeing auctions that might produce windfalls similar to those in Chicago and Indiana. They’re also looking to recruit private investors to build and operate new toll roads, bridges, and other infrastructure.

If the deals can overcome resistance from anti-privatization groups and from politicians who benefit from keeping a stranglehold on government assets, they could help make up for decades of underinvestment in infrastructure—and thereby renew America’s landscape. “There’s probably $100 billion in domestic capital alone that’s being raised to invest in these transactions, and when that’s leveraged with debt, you’re probably looking at up to $400 billion in money that’s ready to go to work,” says Dana Levenson, Chicago’s former chief financial officer and now an investment banker at Royal Bank of Scotland. Add foreign investment to the mix, and the sums get even more impressive.

The trend proves the axiom that what’s old can be new again. Private investment in infrastructure, especially bridges and roads, was common in early United States history. Immediately after the Revolutionary War, for instance, investors put up $465,000 to build the Philadelphia-Lancaster Turnpike, a 66-mile toll road that proved so popular that it led to further waves of private investing in highways. During the first half of the nineteenth century, private funds provided the young republic with some 600 toll roads. And as the country spread westward during the second half of the century, infrastructure investors helped ease the way, with 100 toll roads in California alone. In fact, the private sector kept building roads until the automobile’s arrival prompted more extensive—and costly—government safety regulations, which at the time made toll roads a largely unprofitable venture. Government turned to new methods—especially municipal bonds, which investors like because they aren’t taxed—to finance infrastructure.

Privately financed infrastructure has made another appearance in post–World War II Europe. Starting with 1955 legislation, France began to tap private investors to build and operate what eventually amounted to 3,400 miles of autoroutes between cities. Margaret Thatcher’s energetic privatization drive in 1980s England sold existing government assets and spawned scores of public-private construction projects. The Soviet Union’s collapse led to extensive privatization in former Eastern bloc countries during the nineties. The U.S. Department of Transportation figures that worldwide, more than 1,100 public-private deals have taken place in the transportation field alone over the last two decades. Total value: approximately $360 billion.